Hey, commercial real estate brokers? Keep your compensation a secret, even from your own clients. They don’t know how much you make, they’re too dumb to figure it out, and if you don’t bring it up they won’t think about it. NOW, REALLY!
In most commercial real estate leasing transactions, commercial brokers representing tenants receive their compensation in the form of commissions paid by landlords. Yep, that sure sounds like a conflict-of-interest to me! But, unfortunately, that’s the way the industry works.
Guess what?
Your clients can figure out your compensation…and, they will!
Why withhold information from you own client?
When your role is to protect your client’s interests, withholding information that they can easily figure out on their own makes you look stupid and dishonest
Are you obligated to disclose your compensation to your clients? While you may not have any legal obligation to do so, from a moral and ethical perspective, I’m pretty sure the answer is “Yes!”
Whether or not you should disclose your compensation to your clients also begs other questions:
Why would you want to be transparent?
Are you concerned that someone might view your situation as your being over compensated somehow?
Did compensation discussions take place that may have negatively affected your client?
Is something negative going on?
Did you have to do any favors or compromise your position (or that of your client) to secure your compensation?
Were those favors at the expense of your client? Did you disclose them to your client?
What might your client have lost in exchange for the compensation you secured?
Have you compromised your client in any way?
Do any conflicts-of-interest now exist or did they previously exist?
If all you’re doing is getting paid, fairly and adequately, why wouldn’t you disclose your compensation to your client…the one who is the very reason for which you’re able to generate compensation?
About Real Estate Strategies Corporation
Real Estate Strategies Corporation is a respected corporate advisory and transaction services firm that provides thought-leadership, decision-making, planning, project management, and transaction execution services to finance and senior executives at management team-led public, private, and portfolio companies, and not-for-profit organizations. Under the leadership of its award-winning CEO, Andrew Zezas, RealStrat’s clients engage the firm when acquiring, disposing of, renegotiating, or enhancing occupied leased or owned real estate in New Jersey, Pennsylvania, New York, Connecticut, and throughout North America. By creating and executing Business DRIVEN Real Estate Solutions and identifying hidden Opportunities, RealStrat drives greater operational and financial performance in support of its clients’ stakeholder objectives, M&A requirements, and exit strategies.
In the current economic environment, RealStrat’s efforts are focused on uncovering, capturing, and re-purposing hidden liquidity and minimizing risk in its clients’ leased and owned real estate. The firm provides counsel as to competitive advantage strategies in preparation for the eventual economic recovery. Visit www.RealStrat.com. Read about timely commercial real estate issues at RealStrat’s blog at www.CorporateAdvisor.wordpress.com. Follow RealStrat at http://www.Twitter.com/RealStrat.
So, what happens if you uncover bad news and find out that your company’s landlord isn’t just managing cash flow but, may truly be in danger of losing its building…..the building YOUR COMPANY OCCUPIES?!
Here are 9 Defensive Strategies When Your Landlord May Lose The Building Your Company Leases, that might stave off catastrophe:
1. Buy the building from the landlord (This one may be challenging if your company is a small tenant in a large building)
2. Buy the building’s mortgage from the lender
3. Sublease your space (This strategy may be least effective if the building is experiencing financial hardship, especially in markets with little demand for space)
4. Restructure your lease (Can your company create enough of a financial benefit for itself and its landlord to save the building? What would be the quid pro quo?)
5. Seek self-help (Which services, on which the landlord may default, can your company perform or have performed by other service providers, without placing itself into default of its lease?)
6. Check with your real estate professional (What’s the word on the street?)
7. Check with your attorney (What legal remedies might be available to your company?)
8. If your lease is scheduled to expire, move now….move early (The double rent that your company might pay for a short time period, if it moves to other quarters before its lease expires, may be cheap in comparison to the expenses, lost productivity, and other challenges it might experience if the landlord loses its building)
9. Have a conversation with your landlord to determine what you might work out together
In tumultuous economic times such as these, prudence demands that executives be proactive in understanding the stability and risk associated with the real estate their companies occupy. Advanced planning and a little investigative work, coupled with creative solutions can go a long way to protecting your company’s flank.
About Real Estate Strategies Corporation Real Estate Strategies Corporation is a respected corporate advisory and transaction services firm that provides thought-leadership, decision-making, planning, project management, and transaction execution services to finance and senior executives at management team-led public, private, and portfolio companies, and not-for-profit organizations. Under the leadership of its award-winning CEO, Andrew Zezas, RealStrat’s clients engage the firm when acquiring, disposing of, renegotiating, or enhancing occupied leased or owned real estate in New Jersey, Pennsylvania, New York, Connecticut, and throughout North America. By creating and executing Business DRIVEN Real Estate Solutions and identifying hidden Opportunities, RealStrat drives greater operational and financial performance in support of its clients’ stakeholder objectives, M&A requirements, and exit strategies.
In the current economic environment, RealStrat’s efforts are focused on uncovering, capturing, and re-purposing hidden liquidity and minimizing risk in its clients’ leased and owned real estate. The firm provides counsel as to competitive advantage strategies in preparation for the eventual economic recovery. Visit www.RealStrat.com. Read about timely commercial real estate issues at RealStrat’s blog at www.CorporateAdvisor.wordpress.com. Follow RealStrat at http://www.Twitter.com/RealStrat.
As your company seeks to reduce costs and preserve its cash, it is important to keep a careful eye on those other companies that provide services to you that can have a material affect on your ability to conduct business productively, safely, and profitably. Specifically, your company’s landlord could be experiencing financial or other challenges that, if unresolved appropriately, could hinder your company’s ability to enjoy a productive business environment, irrespective of your continued rental payments.
Watch for a number of issues that could signal your landlord is having difficulties, or may be headed for them. They could be signs that your landlord may be in danger of losing its building. While this list is not intended to be complete, some indicators may include:
1. Significant increases in vacancy in your building
2. Increases in vacancy in other buildings where your landlord has an ownership interest
3. Increases in vacancy in neighboring competitive buildings
4. Construction projects that start at your building but, languish unfinished for extended time periods (typically a sign that contractors are not being paid on time or at all)
5. Decline in response time and / or communications for service, maintenance, or repairs (a sign that staff has been cut or is stretched too thin)
6. Increase in equipment and system breakdowns, such as elevators, HVAC systems, etc. (indicates a decline in preventative maintenance, staff cuts, or more)
7. Fewer landlord or management company employees visible on site
8. Decline in security, life and property safety services
9. Consistent lack of consumable items in restrooms and other areas
10. Interior office, common area, or window cleaning occurs less often
11. Trash not disposed of in a timely manner or is stored in basements and other areas
12. Snow not removed from parking lots in a timely manner
13. Landscaping not updated or maintained and / or grass is cut less often
14. General deterioration of the appearance of the building, parking lots, and grounds
15. Reduction of tenant events
16. Deferred capital improvements
17. Preventative maintenance announced or planned but, not implemented
18. Floors, glass, and metal and other interior components not polished or maintained
19. Band-aid repairs being made in place of needed capital replacements
20. Unresolved mechanics liens from contractors and other service providers
21. Real estate taxes delayed or not paid
22. Mortgage payments delayed or not paid
23. Water, utility, or other payments delayed or not paid
24. Increase in unresolved or unpaid fines from the municipality and / or other governmental authorities
25. Substantial and / or unexplained increases in operating expenses and costs of landlord or management company provided services passed on to tenants
26. Landlord making multiple requests for you to sign estoppel certificates or lease summaries (suggests that the landlord may be scrambling for financing or attempting to sell the building)
27. Real estate brokers unwilling to show your building to prospective tenants (suggests that landlord is unable or unwilling to pay commissions – typically a sign of a cash crunch)
28. Contractors seeking payment from you instead of landlord (indicates a lack of confidence on the part of contractors in their ability to be paid on time, in full, or at all)
29. Contractors unwilling to work in your building (see above)
30. Multiple switching of leasing and / or managing agents, building managers, cleaning companies, security services, vendors, service providers
31. Landlord selling other assets
32. Landlord’s inability to sell or refinance your building
33. Change in landlord’s leasing program – agreeing to many short term leases to small, transient, and / or undesirable companies
What can you do to protect your company and assure that your environment remains productive, safe, and profitable, and that your company receives the services to which it is entitled?
Imagine planning and executing a well designed defensive operational and financial strategy, only to find out that the real estate your company leases may not be under your control and that the space may be pulled out from under you! That’s right! Your landlord may not be as good at pruning expenses and could lose your building, throwing into question your company’s rights to remain in its space.
“But, we have a lease with many years remaining; We pay rent and have never been late! They can’t take our space away from us….can they?”
The answer to that question is a resounding…..”That depends!” It depends on a number of factors, from whether or not your landlord will really lose its building, to who will end up with it, to what the process will be if the landlord does lose the building, to how thorough your company’s lease was negotiated in the first place and what protections that document affords you.
The first step is to read your company’s lease. Check all of the clauses that might impact your occupancy, including those pertaining to non-disturbance, landlord default, self-help, sublease, early termination, and others. Since your lease constitutes the rules of engagement, be certain to understand your company’s rights, privileges, and obligations, in the event of a serious landlord problem.
Make it your business to understand all lease components that could affect your company’s ability to remain in the building if the landlord were unable to support it financially. Specifically, does your lease provide for self-help (the ability to secure services that the landlord fails to provide) in the event that the landlord defaults in providing services to you? Can you contract for temporary cleaning and other services? Can you secure utilities directly from the utility provider? Can you do the above without putting your company into default of its lease?
What if the landlord actually goes bankrupt and ownership of the building reverts to the lender? Can the lender terminate your lease? Maybe! Does your lease require the landlord to secure a non-disturbance agreement for you from the lender? Has the landlord provided you with that document? A non-disturbance agreement, if written properly, will most often prevent a successor, like a lender, from terminating your lease.
By now, you’re likely asking: “Why would a lender terminate our lease? Wouldn’t they prefer to retain rent paying tenants?”
That, too, depends! It is possible that your building could have a greater value or a greater likelihood of being sold if it were vacant. Perhaps a larger tenant, or one that for some reason is more desirable, may want your space. Or, maybe your company’s use of its space is not conducive to the lender’s future plans for the building. Without a non-disturbance agreement, your company could receive notice to vacate and have little choice.
When commercial landlords experience financial difficulties, the tell tale signs may be easy to spot. In many cases, payments to vendors, service providers, taxing authorities, and others become delayed or are sometimes not paid at all. In others, the building shows signs of neglect.
If you believe you have reason to be concerned, do a little detective work. Check with the local property tax dept, utility companies, and other building services providers to confirm that bills are being paid in-full and on-time. Ask around, too. Are vendors, commercial real estate brokers, contractors, and others being paid in-full and on-time? But, be careful here. You wouldn’t want to spook anyone and create concern about your landlord if problems don’t exist.
Above, we discussed 33 Signs That the Building Your Company Leases May Be In Serious Financial Trouble. Guess what? There are more than 33 signs! Take a look around your building and ask yourself some of these questions:
34. Has building management or maintenance staff been cut?
35. Is the landlord any less responsive?
36. Are capital projects being delayed?
37. Is construction languishing in an incomplete state for extended periods?
38. Are repairs taking too long to complete?
39. Does the building look as good as it did?
40. Are the interior and exterior common areas being well maintained?
41. Is the landscaping being properly maintained, trash being removed and parking areas being plowed of snow promptly?
42. Are vacancies growing?
43. Are smaller, less desirable, and / or transient tenants taking space?
44. Has the landlord tried unsuccessfully to sell or refinance the building?
These are common indicators that a building and / or its landlord may be in serious financial trouble. So, how bad could it get? What could happen if your landlord DOES lose your building to its lender…..or, to the sheriff for non-payment of property taxes? It could get ugly…very ugly, with your company’s productive becoming the victim.
Do your homework…early and thoroughly!
About Real Estate Strategies Corporation Real Estate Strategies Corporation is a respected corporate advisory and transaction services firm that provides thought-leadership, decision-making, planning, project management, and transaction execution services to finance and senior executives at management team-led public, private, and portfolio companies, and not-for-profit organizations. Under the leadership of its award-winning CEO, Andrew Zezas, RealStrat’s clients engage the firm when acquiring, disposing of, renegotiating, or enhancing occupied leased or owned real estate in New Jersey, Pennsylvania, New York, Connecticut, and throughout North America. By creating and executing Business DRIVEN Real Estate Solutions and identifying hidden Opportunities, RealStrat drives greater operational and financial performance in support of its clients’ stakeholder objectives, M&A requirements, and exit strategies.
In the current economic environment, RealStrat’s efforts are focused on uncovering, capturing, and re-purposing hidden liquidity and minimizing risk in its clients’ leased and owned real estate. The firm provides counsel as to competitive advantage strategies in preparation for the eventual economic recovery. Visit www.RealStrat.com. Read about timely commercial real estate issues at RealStrat’s blog at www.CorporateAdvisor.wordpress.com. Follow RealStrat at http://www.Twitter.com/RealStrat.
I love it when some commercial landlords claim that the commissions they pay to commercial real estate brokers should be conditioned on whether a tenant performs or defaults under a lease. Some landlords insist that they should not be required to make future commission payments if tenants default. Some go so far as to demand reimbursement of commissions by real estate brokers when tenants default.
Many commercial landlords argue that commissions should be paid based on the value landlords derive when tenants pay rent. Those landlords claim that if a tenant defaults in paying rent, then the landlord’s value is diminished, and the commercial real estate broker should somehow be responsible for that default and should not be entitled to its full compensation.
This is simply an issue where commercial landlords attempt to pass on their risk to real estate brokers, as a result of landlords not performing the due diligence necessary to protect their own interests. Do landlords really believe that real estate brokers are capable of analyzing the financial abilities of commercial tenants? Do landlords really expect brokers to act as credit analysts and insurers of tenant creditworthiness?
Sure, the compensation of commercial real estate brokers is performance based. But, to who’s performance does that relate? Not the tenant’s performance! Real estate brokers are not compensated based on the performance of their tenants. That’s why most courts of law have found that a real estate broker’s commission is due when the lease is executed by landlord and tenant, not at the end of the lease after the tenant has performed its obligations. So, from a landlord’s perspective, a commercial real estate broker should be paid for its own performance, for “delivering” a tenant, not for what that tenant does or doesn’t do after the landlord has accepted the tenant and after the landlord has freely elected to enter into a transaction with that tenant.
In fact, a commercial real estate broker working on behalf of a tenant may receive payment from the landlord, who is, in turn reimbursed by the tenant for the cost of the broker’s compensation along with other costs through payment of rent. So, because tenants reimburse landlords for real estate broker compensation, some courts of law have held that, in fact, it is the tenant that actually pays the broker’s commission.
The world has changed and business, especially commercial real estate, has become a riskier industry. Companies that appear to be healthy may not be, or may become unhealthy and default on their obligations at a later date. This puts more burden on commercial landlords, and the necessity for them to take greater steps to protect their interests has become even more important. For the record, it is not only tenants that can become unhealthy….
The issue of whether landlords should place the burden of tenant default on the backs of commercial real estate brokers has been an on-going source of debate, both in this blog, in LinkedIn, and in the commercial real estate industry. And, so long as some commercial landlords, not the best or strongest landlords, mind you, unfairly attempt to shift their obligations and risks onto commercial real estate brokers, unfortunately this discussion will continue.
However, as the commercial landlord industry consolidates and becomes more sophisticated, that out-dated mentality of “stick-it-to the-real-estate-brokers” appears to be fading away, as greater numbers of commercial landlords recognize the benefits they derive from commercial real estate brokers representing tenants and the commissions to which those brokers are rightfully entitled.
About Real Estate Strategies Corporation Real Estate Strategies Corporation is a respected corporate advisory and transaction services firm that provides thought-leadership, decision-making, planning, project management, and transaction execution services to finance and senior executives at management team-led public, private, and portfolio companies, and not-for-profit organizations. Under the leadership of its award-winning CEO, Andrew Zezas, RealStrat’s clients engage the firm when acquiring, disposing of, renegotiating, or enhancing occupied leased or owned real estate in New Jersey, Pennsylvania, New York, Connecticut, and throughout North America. By creating and executing Business DRIVEN Real Estate Solutions and identifying hidden Opportunities, RealStrat drives greater operational and financial performance in support of its clients’ stakeholder objectives, M&A requirements, and exit strategies.
In the current economic environment, RealStrat’s efforts are focused on uncovering, capturing, and re-purposing hidden liquidity and minimizing risk in its clients’ leased and owned real estate. The firm provides counsel as to competitive advantage strategies in preparation for the eventual economic recovery. Visit www.RealStrat.com. Read about timely commercial real estate issues at RealStrat’s blog at www.CorporateAdvisor.wordpress.com. Follow RealStrat at http://www.Twitter.com/RealStrat.
Q&A on Tenant Representation with a Commercial Landlord Part Three of a Three Part Post
Most commercial landlords understand the role of tenant representation brokers and welcome the benefits they derive when tenant representation brokers properly educate and advise their tenant clients. However, some landlords, mostly old-school die-hards, continue to maintain very negative views of all things about the tenant representation process. Some actually get offended by the very idea of a tenant representation broker. Offended!? What’s that about?
In a recent Q&A conducted via email with a prominent commercial landlord, I had the opportunity to hold a completely frank and open discussion about his views about tenant representation brokers. And, while some of the conversation was challenging at times, both of us came away having learned from each other.
I invited the commercial landlord to provide me with his views on tenant representation, tenant representatives, and how he’d prefer to conduct the business of leasing his properties. The conversation got so good, that it took me three posts to include it all. Be sure to go back and read Parts One and Two! Following is Part Three of that dialogue:
7.Landlord: I wish tenant representative brokers would….
A) Present complete information on ALL tenant requirements at their first communication with me
RealStrat’s Response: Do you present all of your requirements at your first communication with tenant representatives? Of course not! While most tenant representatives strive to provide complete information, so that landlords can make informed and intelligent decisions, sometimes complete information is unavailable. In other instances, certain information may be confidential or may change over time as a result of landlord responses, negotiations, or changes in the objectives and needs of tenants. So, providing ALL information at the first communication, while a preferable approach, may not always be possible.
B) Permit landlords and tenants to negotiate directly
RealStrat’s Response: Depending on many moving parts, including issues of confidentiality, tenant preferences, landlord’s style, and more, permitting direct negotiations may not be beneficial to tenants or to the transaction.
C) Not grandstand
RealStrat’s Response: Absolutely! Frankly, no one likes a show off!
D) Make the overall transaction process easier for the landlord
RealStrat’s Response: Unfortunately, while no one should intentionally make a transaction unnecessarily challenging, the demands made to the tenant representative by its client may have the unintentional result of creating challenges for the landlord. And, since the tenant representative’s job is protect the interests of the tenant, making things easier for the landlord may not be on the tenant’s agenda.
E) Communicate thoroughly, more often, and in greater detail
RealStrat’s Response: A tenant representative should absolutely communicate effectively to landlords, especially when asking that landlord to be responsive and expend time and resources in an effort to complete a transaction. However, in protecting their tenant’s interests, tenant representatives may not be able to communicate in a manner always preferred by landlords.
F) Hurry the hell up! Tenant representatives often take too long and drag out the process. Either make a deal with me or let me move on to a real prospect!
RealStrat’s Response: You’re certainly right about that! Sometimes, transactions feel like they take forever. But, in many instances, tenant representatives and their tenants must contend with changing business tides and the resulting impact on the tenant’s real estate requirements. Additionally, based on how you and other landlords negotiate, the outcome of the transaction, and the tenant’s preferences as to where and how it will make a deal, in many cases, is not known until closer to the end of the negotiation process.
G) No longer exist (I had to! Just kidding)
RealStrat’s Response: Ha! Ha! Landlords, tenants, and tenant representatives maintain a peculiar set of relationships. Tenants and tenant representatives each have the kind of relationship with landlords that makes them dependent opponents. Even with their bumps and potholes, the relationships work, and they result in profits and success for all involved. As the world changes, so will the roles and relationships of these three parties. Tenant representatives, the direct value they create for their tenant clients, along with the indirect value landlords derive from their presence, will likely be around for a long time.
Mr. Landlord, thanks for being open about your beliefs and your concerns, and for being a good sport about this sensitive topic. I hope that my replies helped you as much as your comments helped me.
About Real Estate Strategies Corporation Real Estate Strategies Corporation is a respected corporate advisory and transaction services firm that provides thought-leadership, decision-making, planning, project management, and transaction execution services to financial and senior executives at management team-led public, private, and portfolio companies, and not-for-profit organizations. Under the leadership of its award-winning CEO, Andrew B. Zezas, RealStrat’s clients engage the firm when acquiring, disposing, renegotiating, or enhancing occupied leased or owned real estate in New Jersey, Pennsylvania, New York, Connecticut, and throughout North America. By creating and executing Business DRIVEN Real Estate Solutions and identifying hidden Opportunities, RealStrat drives greater operational and financial performance in support of its clients’ stakeholder objectives, M&A requirements, and exit strategies.
In the current economic environment, RealStrat’s efforts are focused on uncovering, capturing, and re-purposing hidden liquidity and minimizing risk in its clients’ leased and owned real estate. The firm provides counsel as to competitive advantage strategies in preparation for the eventual economic recovery. Visit www.RealStrat.com. Read about timely commercial real estate issues at RealStrat’s blog at www.CorporateAdvisor.wordpress.com. Follow RealStrat at http://www.Twitter.com/RealStrat.
Q&A on Tenant Representation with a Commercial Landlord Part Two of a Three Part Post
Most commercial landlords understand the role of tenant representation brokers and welcome the benefits they derive when tenant representation brokers properly educate and advise their tenant clients. However, some landlords, mostly old-school die-hards, continue to maintain very negative views of all things about the tenant representation process. Some actually get offended by the very idea of a tenant representation broker. Offended!? What’s that about?
In a recent Q&A conducted via email with a prominent commercial landlord, I had the opportunity to hold a completely frank and open discussion about his views about tenant representation brokers. And, while some of the conversation was challenging at times, both of us came away having learned from each other.
I invited the commercial landlord to provide me with his views on tenant representation, tenant representatives, and how he’d prefer to conduct the business of leasing his properties. The conversation got so good, that it took me three posts to include it all. Be sure to go back and read Part One, and then check-in again next week to read Part Three! Following is Part Two of that dialogue:
5.Landlord: I have to put up all the cash and take all the risk! I don’t appreciate that tenant representatives won’t share my risk.
RealStrat’s Response: Tenant representatives are well aware of the many challenges that landlords face, especially in the current economic environment. A large part of what landlords must contend with is how they can effectively manage their risk. Landlords bear a lot of risk in leasing transactions, and in most everything they do. However, with risk comes the potential for upside reward.
Tenant representatives, and brokers in general, are also in the risk / reward business, but only to the extent of investments of their time and resources prior to, and during, the execution of a transaction. Brokers pursue tenants and bear the risk of not winning those assignments. Then after being engaged, brokers risk that their tenants might not complete transactions that would yield compensation commensurate with the broker’s investment of time, resources, and risk.
Beyond that, specifically after landlords and tenants execute transactions, brokers are not in the business of managing the same risks as landlords. Nor are brokers entitled to the same upside rewards as landlords, including equity and portfolio appreciation, tax advantages, debt and equity financing, and more.
So, regarding compensation and risk participation, like every industry, landlords and tenant representatives bear their own risks. When engaged in transactions, tenant representatives are not participants in landlord’s risk (nor in landlord’s upside benefits) for very simple reasons, because participating in landlord risk would:
A) Align the interests of tenant representatives with that of landlords, which would pose a clear conflict-of-interest in relation to tenant representatives’ obligation to act solely in the best interests of their tenant clients.
B) Unfairly affect the compensation of tenant representatives by virtue of their acceptance of landlords’ risk without the benefit of the quid pro quo associated with the upside opportunity afforded landlords. Again, if such upside were provided to tenant representatives, it could align tenant representatives and landlords posing conflicts-of-interest between tenant representatives and tenants.
C) Unfairly force tenant representatives into a compensation model other than that of generating fees
D) Place tenant representatives in the position of acting as guarantor of their tenants’ ability to perform under their leases
None of the above fit into the tenant representation model too well. Frankly, landlords and tenant representatives have their own risks which should be kept separate from each other and from those of tenant representatives.
6.Landlord: It is wrong that tenant representatives want to be paid up front when I don’t know if the tenant will uphold its lease obligations or pay its rent, especially after I put up all the transaction costs and have to wait until all the free rent expires.
RealStrat’s Response: This is a similar discussion to the one above about risk. Waiting for an extended time period before getting paid creates real challenges. As tenant representatives, we completely understand that. Remember, that it typically takes three to nine months for landlords and tenants to complete transactions, plus many months or even years for tenant representatives to build relationships and win a tenant’s business. So, by the time tenants close their deals, tenant representatives have typically been working without compensation for at least a year, and in many cases, longer.
But, let’s get to the real issue of the relationship between a tenant representative’s service and its compensation. When a landlord and tenant execute a transaction, as far as the landlord is concerned, the job of the tenant representative is done. After that, it’s then up to the landlord and tenant to perform their obligations under the terms of the lease they executed.
Prior to executing a lease with a tenant, one would expect that a professional landlord would have assessed the tenant’s creditworthiness, and determined whether the tenant was an acceptable risk and whether or not the landlord should even conduct business with the tenant. During the lease term, it is the tenant’s responsibility to make rent payments on a continual and timely basis and follow the rules defined in the lease. If either the landlord made a bad assessment (or, didn’t conduct one), or the tenant fails to perform, neither of the above are controllable by, nor the responsibility of, the tenant representative. Accordingly, tenant representatives are not in the tenant credit guarantee business.
Like the plumber who installs a sink in your home, if you select the sink because you’re satisfied with its quality and then you pay the plumber because you’re satisfied with his installation, if the sink fails because it was manufactured poorly or it cannot perform the way the manufacturer said it would, then you should pursue the manufacturer, not the installer, unless of course the installer provides you with a written guarantee for the product, too. Few commercial real estate brokers are in a legitimate position to guarantee a tenant’s performance under a lease.
And, NO! Mr. Landlord, you should not rely on claims made by a tenant representative as to a tenant’s creditworthiness. Neither should tenant representatives make such claims. Do your own homework and protect yourself from unnecessary risk. If you foolishly rely on anyone to ascertain a company’s creditworthiness, especially one who is not qualified to make such a determination, then you deserve the added risk and the consequences.
Remember that plumbers don’t accept payment each time you turn on the water, because they don’t usually guarantee the manufacturer’s product, only their own work. Correspondingly, tenant representatives don’t guarantee the ability of tenants to perform their lease obligations, only their own work. If you’re not satisfied with the tenant representative’s work (remember that they represent the tenant!), then address that before completing the transaction (don’t do the deal!), not after the tenant defaults. So, when the plumber and the tenant representative have completed their duties, they both expect to be paid in-full without the risks associated with accepting payments over time, tenant default or sink failure, or otherwise.
Choose any analogy you wish. If you buy a new car and it doesn’t work, the manufacturer must stand behind it. You don’t get to take back the dealer’s compensation.
Read Part One now. Stop by next week to read Part Three of this three-part post.
About Real Estate Strategies Corporation Real Estate Strategies Corporation is a respected corporate advisory and transaction services firm that provides thought-leadership, decision-making, planning, project management, and transaction execution services to financial and senior executives at management team-led public, private, and portfolio companies, and not-for-profit organizations. Under the leadership of its award-winning CEO, Andrew B. Zezas, RealStrat’s clients engage the firm when acquiring, disposing, renegotiating, or enhancing occupied leased or owned real estate in New Jersey, Pennsylvania, New York, Connecticut, and throughout North America. By creating and executing Business DRIVEN Real Estate Solutions and identifying hidden Opportunities, RealStrat drives greater operational and financial performance in support of its clients’ stakeholder objectives, M&A requirements, and exit strategies.
In the current economic environment, RealStrat’s efforts are focused on uncovering, capturing, and re-purposing hidden liquidity and minimizing risk in its clients’ leased and owned real estate. The firm provides counsel as to competitive advantage strategies in preparation for the eventual economic recovery. Visit www.RealStrat.com. Read about timely commercial real estate issues at RealStrat’s blog at www.CorporateAdvisor.wordpress.com. Follow RealStrat at http://www.Twitter.com/RealStrat.
Q&A on Tenant Representation with a Commercial Landlord Part One of a Three Part Post
Most commercial landlords understand the role of tenant representation brokers and welcome the benefits they derive when tenant representation brokers properly educate and advise their tenant clients. However, some landlords, mostly old-school diehards, continue to maintain very negative views of all things about the tenant representation process. Some actually get offended by the very idea of a tenant representation broker. Offended!? What’s that about?
In a recent Q&A conducted via email with a prominent commercial landlord, I had the opportunity to hold a completely frank and open discussion about his views about tenant representation brokers. And, while some of the conversation was challenging at times, both of us came away having learned from each other.
I invited the commercial landlord to provide me with his views on tenant representation, tenant representatives, and how he’d prefer to conduct the business of leasing his properties. The conversation got so good, that it took me three posts to include it all. Be sure to read all three posts over the next three weeks! Following is Part One that dialogue:
1. Landlord: I would prefer to deal directly with tenants and to apply my creative deal making abilities to solve their problems, without having to work through tenant representatives.
RealStrat’s Response: In a world where transparency, disclosure, conflict-of-interest, and Sarbanes-Oxley are commonplace, for all but a few companies, it would be next to impossible for them to rely on recommendations made by transactional opponents, without having the benefit of advice and representation from third-party advisors whose job would be to protect their interests.
Additionally, professional landlords recognize the benefits of dealing with tenants who have been educated as to market conditions and properly prepared by their advisers, especially when those tenants are organized, ready, and perhaps pre-approved to make a deal.
2.Landlord: I view tenant representatives as obstacles.
RealStrat’s Response: Guess what? That’s precisely why many tenants engage tenant representatives (also known as corporate advisors). To state the obvious, landlords benefit from higher rents, lower allowances and incentives provided to tenants, and more square feet leased for longer terms. Tenants benefit from lower rents, higher allowances and incentives provided by landlords, the right amount of square feet and a length of term that best supports their business objectives. Given the opposing position between landlords and tenants, tenants see one of the many important roles of their advisors is that of a knowledgeable gatekeeper, and at times, and somewhat of an obstacle to keep the landlord from going in the wrong direction.
3. Landlord: Tenant representatives make deals more complicated.
RealStrat’s Response: Many tenants have complex business requirements that demand creative solutions. When it comes to satisfying a tenant’s operational or financial objectives, keeping it simple…the right approach in many instances…may not always be possible.
4. Landlord: I don’t like paying commissions to brokers who don’t represent me and who negotiate against me.
RealStrat’s Response: That’s interesting, because actually, tenant representatives would prefer not to be paid by their clients’ opponents. Receiving payment from a landlord when representing a tenant makes things very complicated for tenant representative brokers. Few industries handle compensation in a manner similar to that of commercial real estate, where the tenant’s advisor is most often paid by the landlord, the tenant’s transactional opponent. By changing industry compensation practices, this challenge could be eliminated. Because it remains the norm, most tenants prefer that landlords bear this responsibility. So, until that change occurs, landlords and tenant representatives are stuck with each other as it relates to compensation.
Stop by next week to read Part Two of this three-part post.
About Real Estate Strategies Corporation Real Estate Strategies Corporation is a respected corporate advisory and transaction services firm that provides thought-leadership, decision-making, planning, project management, and transaction execution services to financial and senior executives at management team-led public, private, and portfolio companies, and not-for-profit organizations. Under the leadership of its award-winning CEO, Andrew B. Zezas, RealStrat’s clients engage the firm when acquiring, disposing, renegotiating, or enhancing occupied leased or owned real estate in New Jersey, Pennsylvania, New York, Connecticut, and throughout North America. By creating and executing Business DRIVEN Real Estate Solutions and identifying hidden Opportunities, RealStrat drives greater operational and financial performance in support of its clients’ stakeholder objectives, M&A requirements, and exit strategies.
In the current economic environment, RealStrat’s efforts are focused on uncovering, capturing, and re-purposing hidden liquidity and minimizing risk in its clients’ leased and owned real estate. The firm provides counsel as to competitive advantage strategies in preparation for the eventual economic recovery. Visit www.RealStrat.com. Read about timely commercial real estate issues at RealStrat’s blog at www.CorporateAdvisor.wordpress.com. Follow RealStrat at http://www.Twitter.com/RealStrat.
Commercial landlords and real estate brokers have been forever locked in a battle over the amount and timing of landlord paid compensation, especially when landlords are unsure of the quality and stability of particular tenants. Landlords contend that because brokers bring tenants to landlords, that those brokers should be responsible for their tenants’ creditworthiness and should participate in the credit and other risks borne by landlords.
I’ve written a lot on this subject. Landlords are in the risk management business. Commercial real estate brokers are in the fee for service business, and are therefore not in the business of accepting the type or quantities of risks that landlords accept. Accordingly, this matter is more appropriately one to be had between landlord and tenant.
The reality is that commercial tenants are responsible for their own creditworthiness, good, bad, or otherwise. And, while landlords are in the business of bearing acceptable levels of risk, neither landlords or brokers should bear unnecessary or unreasonable amounts of risk on a tenant’s behalf.
In assessing the financial wherewithal of commercial tenants, landlords will consider numerous factors, including a tenant’s:
· Business history (number of years in business, stability, growth and contraction)
· Industry stability (software, personnel, other)
· Place of incorporation
· Country of origin, treaties between that country and the United States, and the ease or challenge with which a landlord can expect to contend to collect amounts owed, before lease provisions, ensure tenant performance, and more
· Financial statements and other information provided by tenant
· Bank references
· Rent payment history
· Legal history
· Creditworthiness
· Credibility of the management team, investors, and others
· Tenant’s willingness to proactively provide information and insight, and answer questions
· Landlord’s ability to understand tenant’s business model and horizon
· Tenant’s negotiating posture, responsiveness, and reasonableness
· Tenant’s required business terms, cost of construction and other transaction components
· Tenant’s desired length of lease term
· And, more
A landlord’s perception of the riskiness of a particular tenant can affect almost every part of a transaction, including:
· Annual rental rate
· Rent increases (amount & frequency)
· Free rent
· Construction and other allowances
· Rights and options to expand, contract, terminate, renew, purchase, other
· Non-monetary business terms
· Security deposits
· And, more
Security deposit requirements can make or break a deal. Tenants perceived to have superior credit and long-term stability can often expect to pay little or no security. This can change depending on the particulars of any transaction, including the need for the tenant to secure large construction allowances, free rent, or other monetary concessions and incentives.
Some landlords prefer to receive cash security deposits, while others insist on letters of credit. Other landlords insist that all cash investments required of them to complete a transaction, including those for construction, commissions, legal and administrative costs, free rent, and more, be secured. When landlords perceive a tenant to be very risky, they may require that the tenant guarantee all rental payments in some manner.
It must be said that certain landlords, because of their own financial challenges, may inaccurately view certain tenants as more risky than they really are. The issue of landlord risk is one on which tenants should directly focus before entering into any real estate transaction.
When it comes to securing a real estate transaction, effective communication between landlord and tenant, whether directly or properly coordinated through tenant or landlord brokers, is essential to understanding risk and distributing that risk in a balanced manner in any transaction.
As for brokers acting as guarantor of the tenant’s creditworthiness and performance of lease obligations, that’s about as absurd as brokers guaranteeing landlord credit and performance. Brokers are fee-for-service professionals, not credit analysts, nor guarantors. Frankly, if a tenant is viewed by a landlord to be risky, that landlord has many alternatives available to it to mitigate that risk, including not entering into the transaction. Commercial landlords and tenants each come with their own risk, as do brokers. Accordingly, each party should be responsible for those risks for which they have traditionally been responsible, and should not seek to unfairly off-load those risks onto others involved in their transactions.
About Real Estate Strategies Corporation
Real Estate Strategies Corporation is a respected corporate advisory and transaction services firm that provides thought-leadership, decision-making, planning, project management, and transaction execution services to financial and senior executives at management team-led public, private, and portfolio companies, and not-for-profit organizations. Under the leadership of its award-winning CEO, Andrew B. Zezas, RealStrat’s clients engage the firm when acquiring, disposing, renegotiating, or enhancing occupied leased or owned real estate in New Jersey, Pennsylvania, New York, Connecticut, and throughout North America. By creating and executing Business DRIVEN Real Estate Solutions and identifying hidden Opportunities, RealStrat drives greater operational and financial performance in support of its clients’ stakeholder objectives, M&A requirements, and exit strategies.
In the current economic environment, RealStrat’s efforts are focused on uncovering, capturing, and re-purposing hidden liquidity and minimizing risk in its clients’ leased and owned real estate. The firm provides counsel as to competitive advantage strategies in preparation for the eventual economic recovery. Visit www.RealStrat.com.
THIS WORK IS DESIGNED TO PROVIDE PRACTICAL AND USEFUL INFORMATION ON THE SUBJECT MATTER COVERED AND REPRESENTS THE OPINION OF THE AUTHOR. HOWEVER, IT IS PROVIDED WITH THE UNDERSTANDING THAT THE AUTHOR IS NOT ENGAGED IN RENDERING LEGAL, FINANCIAL, ACCOUNTING, OR OTHER PROFESSIONAL ADVICE TO THE READER. IF LEGAL, FINANCIAL, ACCOUNTING, OR OTHER PROFESSIONAL ADVICE IS REQUIRED, THE SERVICES OF A COMPETENT PROFESSIONAL SHOULD BE SOUGHT. THE AUTHOR SPECIFICALLY AND EXPRESSLY DISCLAIMS ANY LIABILITY THAT MAY BE INCURRED AS A RESULT OF THE USE OR APPLICATION OF THE INFORMATION THAT IS CONTAINED IN THIS WORK.
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